warning, do not read just before you go to bed ... AND I KNOW JDN - not Stephen Roach again - TRY not to hold it against him (or me ... <g>) that he has been almost 100% on target for over a year now.
Global Economic Forum: The latest views of Morgan Stanley Economists
Global: Global Recession -- Longer and Deeper, Stephen Roach
September 25, 2001
Uncertainty remains extremely high in the aftermath of the shocking events of 11 September. But there is painful clarity to the endgame. For a world we judged already to be in synchronous recession before the terrorist attacks on America, the downturn now looks considerably deeper and longer than we ever suspected. Our team of economists around the world has been working around the clock in an effort to add greater precision to the growth warning we issued immediately after this shock. The outcome of what has been a truly extraordinary
collaborative effort follows.
For 2001, we are trimming our estimate of world GDP growth by 0.3 percentage point to 1.8% (from 2.1%). Risks remain largely on the downside to this outcome. But with the bulk of this year now over, I would maintain my earlier view that the lower bound of those risks should probably be placed at around 1.5%. Relative to our below-consensus baseline view of the world, the bulk of our downward revision hits next year. For 2002, we are slashing our forecast of world GDP growth by 1.3 percentage points to 2.1% (from 3.4%). Inasmuch as this pierces the lower bound of the risk range we tentatively placed at 2.25% last week, we are also widening out that risk assessment as well. I would now place the lower bound of our risk range for world GDP growth in 2002 at 1.25%.
Needless to say, this downwardly revised prognosis -- 1.9% average growth in world GDP over the 2001-02 period -- depicts a world in deep recession. After all, 2.5% growth is usually viewed as the global recession threshold. Moreover, if the verdict ultimately falls at the lower end of our new risk range, it would qualify as the worst global recession of the post-World War II era -- both deeper and longer than the contractions of the mid-1970s and early 1980s.
No region of the world economy will be spared in this recession, in our opinion -- hence, its synchronous character. We maintain our previous view that the United States and Japan are now in the midst of outright recessions. Our euro-zone team now looks for a similar outcome to unfold shortly in Euroland. Due to the arithmetic of annual averaging, the year-over-year comparisons should still stay positive in both the US and Europe -- but not by much. Our US GDP growth forecast now averages 1.0% over the 2001-02 interval, down 1.1 percentage points from our previous baseline of 2.1%. Our European GDP growth forecast now averages 1.5% over the 2001-02 interval, down 0.7 percentage point from our previous baseline of 2.2%. For Japan, we are now estimating two consecutive years of outright contraction averaging -0.8%, about a half a percentage point weaker than we had previously been predicting. For the industrial world as a whole, we are now estimating GDP growth of 1.0% in both 2000 and 2001 -- literally one-third the trend growth pace of around 3.1% recorded since 1982.
Two key features of our revised global growth scenario distinguish us from a rapidly changing consensus prognosis. First, we do not expect the US and the broader world economy to experience a sharp, V-shaped rebound from this deep recession. A mechanistic application of traditional business cycle rules would, indeed, produce such an outcome -- the deeper the contraction, the sharper the rebound. As the shocks subside, there will undoubtedly be some vigor to the rebound. But we suspect it will be relatively short-lived as the world quickly
converges on more subdued growth norms.
That’s especially the case for the United States, long the unquestioned leader of the global economy. America is still facing powerful structural headwinds -- excess capacity, an over-extended consumer, and a massive current-account deficit. The terrorist attacks change none of that. Moreover, the underlying productivity trend could well fall far short of that recorded in recent years -- reflecting not only the unwinding of excessive IT spending but a diversion of national output into increasingly unproductive channels such as defense, internal security, and
increased insurance premiums, together with diminished global connectivity. Absent the miraculous appearance of a new growth engine for a US-led global economy, I suspect the world economy will now move to a lower underlying growth trend -- an outcome that must have important implications for the longer-term earnings expectations embedded in equity markets.
Second, and related to the first point above, we do not share the consensus view that inflation is about to accelerate. We interpret the devastating events of 11 September and their lingering aftereffects as a deflationary shock to the global economy. The shock to aggregate demand, in our view, is likely to be well in excess of any curtailments to aggregate supply. As a result, industrial world inflation is still expected to decelerate sharply over the next year, dropping from an estimated 2.2% increase in 2001 to 1.5%, or lower, in 2002. Under the potential threat of military actions, we are assuming that oil prices could spike up into the low-$30 range in the months ahead (Brent basis) before falling to $20 by year-end 2002. The coming deflationary shock to the global economy is likely to be more serious than that which occurred in late 1998 in the depths of the Asian financial crisis. Yet long-duration assets in fixed income markets -- especially risk-free sovereign debt -- are not priced for such a possibility. By contrast, government bond markets have been battered by a rethinking of a once-constructive fiscal policy profile. A reevaluation of inflationary risk could be an important, and unappreciated, offset.
In a turbulent and uncertain world it is critical to have a clear understanding of the assumptions that underlie any forecast. I would stress three such assumptions: First, we are not making any allowances for additional terrorist attacks and a massive retaliatory military strike by the United States. Our operative assumption is "not one battle, but a lengthy campaign," as outlined by President Bush before the US Congress on 20 September. Second, we are assuming significant further stimulus by the authorities, with America leading the way. We are building in another 75 basis points of rate cuts by the Federal Reserve by year-end 2001 and a fiscal stimulus on the order of approximately $60 billion. Given the flurry of recent activity in Washington, there is risk of even greater stimulus, especially on the fiscal side of the equation. Needless to say, we will modify our policy assumptions accordingly, should circumstances dictate. Third, we are building in some modest improvement to our 2002 forecasts for the developing regions of non-Japan Asia and Latin; our thinking here is that the downside of the coming consumer shock will be less severe than the impacts of the IT shock that has already hit.
The world now appears to be in its fifth recession since 1970. Just as each of those earlier downturns has been followed by recovery, we expect the same will be the case this time as well. That’s especially the case, given the unique nature of this recession -- a downturn whose fate was sealed by a wrenching psychological shock. Like grief, time heals such a devastating blow. And we remain hopeful that such healing will commence in the latter half of 2002. But this global recession is very different from any of its predecessors. The world is at a critical tipping
point. As a seasoned team of economists, we are quite wary of using past experience and old cyclical models as guides for what lies ahead. Uncertainty remains high and risks are skewed to the downside. While we are prepared to modify our views quickly in this changing climate, we believe our new baseline prognosis for the global economy offers a reasonably realistic and sobering assessment of what now lies ahead.
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Global: Globalization's Haunting Past, Stephen Roach
September 26, 2001
Previously, I have argued that the 11 September terrorist attacks on America could turn out to be a real setback for globalization (see my 21 September dispatch, "Globalization at Risk"). My fear was that this was a transforming event that could result in the functional equivalent of a new tax on cross-border connectivity. The tax would show up in the form of heightened national border security, higher shipping costs, increased insurance rates, and an increased risk premium associated with the uncertainty over what comes next. That would not only raise the price of the trade and capital flows that underpin globalization, but it could also play a key role in crimping the outsourcing strategies that lie at the heart of increasingly globalized supply chains. To the extent that financial markets are still priced for further progress on the road to globalization, investors could be in for a rude awakening.
This wouldn't be the first setback for globalization. The integration of the Atlantic economy in the 19th century held out the promise of powerful convergence within Europe and between Europe and the United States. Yet this seemingly unstoppable trend ultimately sowed the seeds of its own demise, leading to a geopolitical backlash that culminated in the Great War of the early 20th century. Yet another wave of globalization occurred in the inter-war period of the 1920s, only to be brought to an abrupt end by the Great Depression and a renewed outbreak of
worldwide war.
The historians have done a good job in pinpointing several sources of instability in these earlier episodes of globalization. In Globalization and History (MIT Press, 2000), Kevin O'Rourke and Jeffrey Williamson identify three key characteristics of the globalization of the Atlantic economy in the 19th century that led to a backlash -- ever-widening cross-border income inequalities, unstable trade and capital flows, and mounting geopolitical tensions. In The End of Globalization (Harvard University Press, 2001), Harold James focuses on the 1920s and adds two additional sources of instability -- systemic problems in the banking system and a reaction against international migration. Both studies end with the warning that there is nothing inevitable about globalization. In the initial rush to convergence, the trend almost always seems unstoppable. But then it invariably succumbs to the unintended consequences it has spawned.
Could that be the case today? Quite possibly, inasmuch many of the preconditions for earlier backlashes against globalization have been satisfied. For example, there is compelling evidence in support of the case for widening global income disparities over most of the past century. That's true of disparities between rich and poor nations, as well as between income groups within most countries. According to research conducted by the International Monetary Fund, real income per capital in many of the world's "poor" countries at the end of the 20th century remained below income levels prevailing in "rich" countries at the start of the century. The IMF also found that
per-capita income for the upper quartile of the global population increased more than twice as rapidly as for the lower quartile. Economic convergence is widely viewed as the endgame of globalization. Yet at the end of the 20th century, there was still a large segment of the world's population on the outside looking in.
The instability of trade and capital flows was another hallmark of the late 20th century. The volatility of the global trade cycle is without precedent in recent years. By our estimates, global trade volumes surged by a record 12.8% in 2000. But this boom has quickly turned to bust; our forecast of record calls for just a 3% increase in 2001 -- a record deceleration for any one year. Moreover, there is good reason to believe that our estimates are biased to the upside. Based on outright declines in world trade volumes in early 2001, I wouldn't be surprised if there were an
actual contraction for the year as a whole -- the first such occurrence since 1982. Unusual capital flow volatility was also evident in the final two decades of the 20th century. The Latin American debt crisis of the 1980s, the Mexican peso crisis of 1994-95, and the Asian financial crisis of 1997-98 were especially notable milestones in this regard.
And, of course, the shocking events of recent days underscore what now seems to be the biggest threat of all -- mounting geopolitical tensions. That, in my view, remains the ultimate irony of the post-Cold War era. Absent the standoff of two superpowers, there has been a distinct fragmentation of the world's political struggles. Whether it's the Middle East, Central Europe, or now Central Asia, internal struggles in each of these regions have had profound spillovers into the broader global arena. Global terrorism is both an outgrowth of those struggles and a catalyst
for new struggles. Henry Kissinger has argued that American hegemony can be turned into a stabilizing force in this Brave New World, provided the United States "transform(s) its power into moral consensus …[and] promote(s) its values not by imposition but by their willing acceptance" elsewhere in the world (see Does America Need a Foreign Policy?, Simon & Schuster, 2001). Needless to say, such a formidable task is unfinished business for a United States that is currently grasping for a post-Cold War foreign policy.
What emerges from this mosaic is an inherent instability in the current wave of globalization that is strikingly reminiscent of forces that led to the demise of earlier efforts. Ever-widening income disparities underscore the plight of those who do not benefit from globalization. Periodic financial crises put pressure on a similar disenfranchised segment of the world. These mounting economic tensions between the "haves" and the "have-nots" are a breeding ground for the social and geopolitical instability that always seems to have the final say on globalization.
The history of failed efforts at globalization seems especially haunting in today's world. It's a history that tells us there is nothing inherently stable about globalization. It's also a history which suggests that globalization has a real tendency to sow the seeds of its own demise. The dialectic of this history has left unmistakable footprints over the past 20 years. The shocking events of 11 September could well bring those lessons of history to a head. If that history is at all relevant -- and I suspect it is -- there's understandably a new sense of urgency to the survival
of globalization. |
